Santander "is going to go ahead and pick up (Abbey)," said Anais Faraj, equity strategist at Nomura Securities in London. "It's a great step for them."

Santander, which is targeting 450 million in annual cost savings by merging with Abbey, said it expects the deal to close on Nov. 12.

While an HBOS takeover would have been difficult - as it would almost certainly triggered a review by British competition regulators - many observers had come to expect an HBOS offer would change the shape of British banking.

Northern Rock (NRK), a rival mortgage lender, for one, hired an investment banker as an advisor as a result of the HBOS interest in consolidation.

Yet with HBOS pulling out, domestic banking deals now looks less likely, Faraj said. Concerns over a hard landing in the British housing market, which is showing some signs of slowing as a result of rising interest rates, has also been weighing over the sector.

"M&A is out of the way for a while," he said. Like Santander, the largest bank in Spain, U.K. banks "will have to start looking at Europe and the U.S."

Expectations that interest rates are nearing their peak in the U.K. after steady drip of quarter point hikes from the Bank of England in the past 10 months could also sour sentiment against the British banks.

European financials, particularly the German financial stocks, have been notching recent gains. "The whole financial services sector, including the insurance sector, is quite strong," said Heino Ruland of Steubing AG, a German broker. "It could mean optimism is general is returning for equities in Germany as this group is perceived to be the leader" for the market trend.

Deutsche Bank
DB, -3.52%
was up 2 percent Wednesday afternoon, building on a 2.7 percent rise on Tuesday. Healthy order intake data for German manufacturers are underpinning the gains for German stocks, but the efforts to extend the working week and other labor market reforms are also a likely contributor, Ruland said

Still, M&A talk is also in the Frankfurt market. While German bank executives in recent weeks have reiterated cautious comments on the prospects for deals, Ruland noted that reports continue to circulate on German bank consolidation as companies seek to cut costs.

The benchmark DAX-30 is up 1.3 percent since the start of the year. The FTSE 100 is up 1.5 percent since the start of the year.

Deal speculation has been lifting the bank stocks in the U.K. as well. HBOS on Aug. 2 announced it was reviewing a potential deal with Abbey. The bank's board was expected to meet this week on a potential 10 billion pound offer for Abbey.

"Notwithstanding the very substantial opportunity to create synergies, and a strong competition case with which to engage the regulators, HBOS has decided not to proceed with an offer for Abbey," HBOS said in the brief statement.

"HBOS believes that the shareholder value inherent in its existing prospects is superior to that likely to be achieved through this combination," the bank said.

Santander sees 3,000 Abbey job cuts

Separately, ahead of its meeting with analysts later in the day, Santander announced it's seeking a secondary listing on the London exchange in the first half of 2005.

A listing would assuage some of the concerns of small investors in Abbey over holding foreign stock. Santander also plans to offer the holders the ability to receive dividends in British pounds as well.

The Spanish bank is expecting cost savings of 450 million euro a year. On Wednesday, it detailed those targets, saying it expected 128 million euro in savings in IT and 83 million euros in customer operations.

The bank increased its estimate of the revenue synergies to around 220 million euro of earnings before tax by 2007, up from a projection of around 150 million euro by the third year. Santander expects the deal to add to its earnings from 2006.

"We view the possibility of a counterbid from another U.K. bank as unlikely," Dresdner Kleinwort Wasserstein said. "We would not be surprised if the stock goes above this level in the coming days as, from a strategic point of view, a friendly takeover of Abbey is the best scenario for investors."

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